(Adds more analyst comments)
By John Parry
NEW YORK, Sept 25 The U.S. commercial paper
market shrank dramatically, marking the biggest weekly
contraction in a year, Federal Reserve data showed on Thursday,
as the escalating global credit crisis shook investors'
confidence in all but the safest instruments issued by the U.S.
The swift erosion of this cornerstone of short term lending
for banks and companies is a canary in a coalmine for the
economy, analysts said. Unless lending to companies and banks
can flow freely again, and soon, the economy could grind to a
standstill, analysts said.
For the week ended Sept. 24, the size of the U.S.
commercial paper market, a vital source of short-term funding
for daily operations at many companies, shrank by $61.0 billion
to $1.702 trillion, the lowest level since early 2006 and down
from $1.763 trillion the previous week, Federal Reserve data
"The declines add to the urgency for fixes to the credit
crisis," wrote Tony Crescenzi, chief bond market strategist
with Miller, Tabak & Co. in New York in an email note.
Financial markets are on tenterhooks to see if the U.S.
government's planned massive bailout legislation for the
financial system gets passed and in what form.
The commercial paper data "adds impetus to get the bill
approved in its nearly complete form," said Kenneth Kim,
economist with Stone & McCarthy Research Associates, in
Princeton, New Jersey.
The erosion of the commercial paper market is "a
manifestation of the credit crunch's self-reinforcing impact on
the U.S. economy," Kim added.
The market's cumulative shrinkage is more than $100 billion
in just two weeks, including the previous week's $52.1 billion
Analysts agree that the commercial paper market, along with
most other conduits of short-term borrowing for banks and
companies, has become effectively paralyzed over the past
Unsecured issuance by financial firms plunged by $50.3
billion in the latest week, the biggest weekly fall since at
least 2001, after declining by $16.9 billion the previous
When the credit crisis started to unfold last summer, the
key area of weakness within commercial paper was
mortgage-related asset backed instruments tied to the already
declining U.S housing market. But now, the sag in issuance by
financial firms is a sign that the whole commercial paper part
is succumbing to broad lending markets stress and endangers the
the whole economy, analysts said.
"These declines in some ways carry more weight than those
of a year ago, when the market was purging issuers with
mortgage-related exposures," wrote Crescenzi. "This time the
purge is broad and is impacting issuers with far more
predictable cash flows--regular run-of-the-mill companies in
need of working capital," he wrote.
As the global credit crisis deepens, banks' distrust of
lending to each other has worsened in interbank markets, with
many hoarding cash for fear that some short-term loans might
not get repaid. A similar dynamic is roiling the commercial
paper market, analysts say.
Money market funds have diverted hefty amounts out of
commercial paper and other non-government instruments into the
ultra-safe haven of Treasury bills, after a money market mutual
fund broke the buck, or fell below $1 per share value last
week, triggering investor fears about the safety of short-term
paper from banks, insurers and companies.
"The declines reflect the seizing up of the credit market
and withdrawals of monies from money market funds, which held
$700 billion of commercial paper at the end of the second
quarter," wrote Tony Crescenzi, chief bond market strategist,
Miller, Tabak & Co. in New York in an email note.
Asset-backed commercial paper outstanding fell $7.8 billion
after falling $18.6 billion the previous week.
U.S. asset-backed commercial paper outstanding slipped to a
total $753.8 billion in the latest week from $761.6 billion the
(Reporting by John Parry; Editing by Chizu Nomiyama)